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Electronically Filed Supreme Court SCWC-XX-XXXXXXX 15-MAR-2023 07:52 AM Dkt. 27 OP
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
---o0o---
NATIONSTAR MORTGAGE, LLC, Respondent/Plaintiff-Appellee,
vs.
ASSOCIATION OF APARTMENT OWNERS OF ELIMA LANI CONDOMINIUMS, Petitioner/Defendant-Appellant,
and
THOMAS BLAKE K. DAVID; SARAH L. DAVID; THE BANK OF NEW YORK MELLON, formerly known as THE BANK OF NEW YORK, as Trustee for the Certificateholders of CWEHQ, Inc., Home Equity Loan Asset Backed Certificates, Series 2006-S6; FIA CARD SERVICES, N.A, Respondents/Defendants-Appellees.
SCWC-XX-XXXXXXX
CERTIORARI FROM THE INTERMEDIATE COURT OF APPEALS (CAAP-XX-XXXXXXX; CIVIL NO. 16-1-373K)
MARCH 15, 2023
RECKTENWALD, C.J., NAKAYAMA, McKENNA, WILSON, AND EDDINS, JJ. *** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
OPINION OF THE COURT BY RECKTENWALD, C.J.
I. INTRODUCTION
The Association of Apartment Owners of Elima Lani
Condominiums (AOAO) foreclosed on a unit owned by Thomas Blake
K. David and Sarah L. David (the Davids) for failure to pay
common assessments. Later, Nationstar Mortgage, LLC
(Nationstar) filed a complaint for foreclosure of the unit
alleging the Davids had defaulted on their mortgage. Almost two
years after AOAO came into possession of the unit, the Circuit
Court of the Third Circuit entered summary judgment and an
interlocutory decree of foreclosure in favor of Nationstar.
However, the circuit court did not confirm a foreclosure sale of
the unit at a public auction until nearly eleven months later.
AOAO contends that it is entitled to the rents that accrued from
the unit during the period between summary judgment and the
confirmation of sale. 1
Under our precedents, a foreclosure judgment is a
final judgment extinguishing the previous owner’s interest in
property. Thus, at common law, AOAO would not be entitled to
post-foreclosure rents. However, and for the following reasons,
we hold that Hawai‘i Revised Statutes (HRS) § 514B-146(n) (Supp.
1 The total amount of rents collected during this period was $6,200.
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2015) 2 provides a scheme for distributing rents following a
lender’s foreclosure against an association. Here, provided
AOAO has not already recouped its losses through the rent it
previously collected, it may be entitled to all or some of the
rent collected for Nationstar after summary judgment.
Accordingly, we vacate the circuit court’s judgment to the
extent it awards post-foreclosure rents to Nationstar and remand
for a calculation of what amount, if any, AOAO is owed from
post-foreclosure rents.
II. BACKGROUND
On July 24, 2015, AOAO foreclosed on the Davids’
condominium for unpaid assessments via quitclaim deed, filed
pursuant to the nonjudicial foreclosure process provided by
HRS § 667, et seq. (2016).
On November 7, 2016, Nationstar filed a complaint for
foreclosure in the circuit court, alleging the Davids had
defaulted on a note and mortgage encumbering the unit and naming
AOAO as one of the defendants. 3 AOAO answered, asserting its
ownership interest in the property. Nationstar filed a motion
2 HRS § 514B-146(n) was numbered as HRS § 514B-146(k) before the statute was renumbered in 2018, and it is referred to as HRS § 514B-146(k) in the briefing. See 2018 Haw. Sess. Laws Act 195, § 4 at 672. Because there was no change to the substance of the statute, we refer to the current numbering, HRS § 514B-146(n), throughout. See id.
3 The Honorable Ronald Ibarra presided over the proceedings for summary judgment, while the Honorable Robert D.S. Kim presided over the proceedings to confirm the foreclosure sale.
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for summary judgment. It asked that the court appoint a
commissioner and direct that person to “[p]ossess, preserve,
operate and manage the Property . . . including, but not limited
to, collecting rental payments and revenues,” and to sell the
property.
AOAO filed a memorandum in limited opposition to
Nationstar’s motion for summary judgment. In relevant part,
AOAO argued it remained the owner of the unit until a
foreclosure sale was confirmed by the court, that it was
entitled to exclusive possession and use throughout the
foreclosure process, and that its right to collect post-
foreclosure rents was reaffirmed by HRS § 514B-146(n). 4
4 HRS § 514B-146(n) provides:
After any judicial or nonjudicial foreclosure proceeding in which the association acquires title to the unit, any excess rental income received by the association from the unit shall be paid to existing lien holders based on the priority of lien, and not on a pro rata basis, and shall be applied to the benefit of the unit owner. For purposes of this subsection, excess rental income shall be any net income received by the association after a court has issued a final judgment determining the priority of a senior mortgagee and after paying, crediting, or reimbursing the association or a third party for: (1) The lien for delinquent assessments pursuant to subsections (a) and (b); (2) Any maintenance fee delinquency against the unit; (3) Attorney’s fees and other collection costs related to the association’s foreclosure of the unit; or (4) Any costs incurred by the association for the rental, repair, maintenance, or rehabilitation of the unit while the association is in possession of the unit including monthly association maintenance fees, management fees, real estate
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The circuit court disagreed. On June 30, 2017, it
entered summary judgment against AOAO and an interlocutory
decree of foreclosure in favor of Nationstar, finding that
Nationstar was owed $382,957.56 in principal, interest, and
costs. Further, it appointed a commissioner to take possession
of and sell the unit, and ordered:
The Commissioner is authorized and directed, after the payment of all necessary expenses of such sale, to make application of all the proceeds thereof and all funds which they hold in their capacity as Commissioner so far as the same may be necessary to the payment of amounts found due and owing to [Nationstar] from the [Davids] under the Loan Documents . . . as determined by this court.
The unit was sold to Nationstar at a public auction on
December 16, 2017. Before the sale, the Commissioner collected
$3,200 in total rents for the months of November 2017, December
2017, and January 2018.
Nationstar filed a motion to confirm the sale,
requesting that “rent on the Property collected by the
Commissioner, if any, shall be paid to Plaintiff . . . , which
sum shall be credited against the amounts due Plaintiff under
its Note and Mortgage.” AOAO again opposed the request for
commissions, cleaning and repair expenses for the unit, and general excise taxes paid on rental income; provided that the lien for delinquent assessments under paragraph (1) shall be paid, credited, or reimbursed first.
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rents, arguing that it was entitled to any rent collected up
until the foreclosure sale. 5
At the confirmation hearing, the circuit court
disagreed that AOAO was entitled to the rents, and directed the
Commissioner to pay all the funds in his possession to
Nationstar. The Commissioner testified that in addition to the
$3,200 in rents from November 2017 to January 2018, he had
collected $1,000 in rent each month for February, March, and
April, for a total of $6,200. The court entered an order
confirming the foreclosure sale on May 16, 2018. Regarding
rents, it denied AOAO’s request for rental proceeds and ordered
the rent be paid to Nationstar. AOAO filed a timely notice of
appeal from the circuit court’s judgment and order.
Before the Intermediate Court of Appeals (ICA), AOAO
made a number of arguments as to why it retained legal and
equitable title until after the foreclosure sale was confirmed.
First, it argued that per the lien theory of mortgages,
Nationstar had only a lien against the property until it was
actually sold. AOAO cited HRS § 506-1(a) (Supp. 2015), which
5 Alternatively, AOAO requested that, if the circuit court denied its request for rents, Nationstar be required to pay AOAO maintenance and reserve fees from June 30, 2017 – the date of the entry of summary judgment – to the sale’s closing. The court stated that it would consider its request once AOAO submitted a ledger of what it was owed. While AOAO did submit a ledger, in its order confirming the foreclosure sale, the court did not address AOAO’s alternate request for assessments.
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provides that a mortgage “shall create a lien only as security
for the obligation and shall not be deemed to pass title.” In
the condominium context, HRS § 514B-146(b) (Supp. 2015) 6 provides
that a mortgagee does not acquire title in a judicial foreclosure
until after the confirmation of sale.
Second, AOAO argued that HRS § 667-102(b)(4) (Supp.
2013) provides that once an “affidavit and the conveyance
document are recorded” in a nonjudicial foreclosure, “[t]he
purchaser shall be entitled to immediate and exclusive
possession of the unit.” Thus, the circuit court erred by
6 HRS § 514B-146(b) provides in relevant part: Except as provided in subsection (j), when the mortgagee of a mortgage of record or other purchaser of a unit obtains title to the unit as a result of foreclosure of the mortgage, the acquirer of title and the acquirer’s successors and assigns shall not be liable for the share of the common expenses or assessments by the association chargeable to the unit that became due prior to the acquisition of title to the unit by the acquirer. The unpaid share of common expenses or assessments shall be deemed to be common expenses collectible from all of the unit owners, including the acquirer and the acquirer’s successors and assigns. The mortgagee of record or other purchaser of the unit shall be deemed to acquire title and shall be required to pay the unit’s share of common expenses and assessments beginning: (1) Thirty-six days after the order confirming the sale to the purchaser has been filed with the court; (2) Sixty days after the hearing at which the court grants the motion to confirm the sale to the purchaser; (3) Thirty days after the public sale in a nonjudicial power of sale foreclosure conducted pursuant to chapter 667; or (4) Upon the recording of the instrument of conveyance; whichever occurs first[.]
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awarding the Commissioner legal and equitable title via the
summary judgment order when AOAO was entitled to possession.
Even if the circuit court had the equitable power to override
AOAO’s statutory right to exclusive possession and rents, to do
so in this case would be inequitable, because while AOAO would
have to burden other, non-defaulting owners with its losses,
Nationstar “would be fully compensated upon the foreclosure
sale.”
Next, AOAO turned to its arguments regarding HRS §
514B-146(n). That statute “contemplates [AOAO] receiving rental
income” after the foreclosure judgment as it “provides twice
that rent shall ‘be received by the association.’” Thus, the
only instance in which Nationstar would be entitled to rental
income is if excess rental income exists, computed as the amount
of post-foreclosure rents “received by the association” after
deducting the items listed in subsections (n)(1) to (4). 7
In response, Nationstar argued that the circuit court
properly distributed the rental income according to lien
priority. It pointed to HRS § 667-102(b)(3) (Supp. 2013), which
provides that an association’s lien is “automatically
7 Last, AOAO argued “[i]n the alternative and as a matter of equity,” that it was entitled to common expenses assessed while the Commissioner was in possession. According to AOAO, “[i]t would be wholly inequitable to require [AOAO] to be responsible for the burdens of ownership . . . while simultaneously giving all of the benefits of ownership to the Commissioner for the eventual benefit of [Nationstar].”
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extinguished” when the association completes a foreclosure. It
also pointed to HRS §§ 667-3 and 667-10 (Supp. 2013), which
provide that proceeds of a mortgage sale are distributed first
to lien holders according to priority and then to the prior
owner.
Further, Nationstar disputed AOAO’s interpretation of
HRS § 514B-146(n). Nationstar argued that this statute creates
an entitlement to post-foreclosure rents for senior mortgagees,
not associations. Nationstar claimed AOAO already recouped the
delinquencies left over from the Davids, and AOAO had no
maintenance costs following summary judgment as the Commissioner
took possession. 8 This reading “harmonizes” HRS § 514B-146 with
HRS §§ 667-3 and 667-10.
The ICA rejected AOAO’s arguments and affirmed the
circuit court’s order confirming the foreclosure sale. First,
it held that AOAO did not state how the circuit court “vested
the Commissioner with title to the [unit].” The circuit court’s
foreclosure decree directed the Commissioner to take possession
and control of the property, but it had not vested title in him.
8 The AOAO alleged that the Davids left $34,002.57 in assessment arrears, recoverable under HRS § 514B-146(n)(1). However, the record does not indicate the amount AOAO was able to collect in rents from the property prior to the appointment of the Commissioner. Nationstar claims that this pre-foreclosure rental income exceeded the sum of the delinquencies, and that the AOAO is therefore not entitled to the $6,200 in post-foreclosure rents.
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Second, the ICA concluded that AOAO’s argument that it
was entitled to rent after the entry of the foreclosure decree
was without merit. For the reasons stated in U.S. Bank Tr.,
N.A. v. Chinen, 150 Hawai‘i 573, 583-84, 506 P.3d 869, 879-80
(App. 2022), the ICA concluded that the circuit court did not
abuse its equitable discretion in ordering that the rents
collected by the Commissioner be turned over to Nationstar. 9
AOAO filed a timely application for writ of
certiorari, arguing that the ICA erred by holding it was not
entitled to rents. It reasserted that summary judgment does not
extinguish the foreclosed owners’ rights to possession because,
per HRS §§ 514B-146(b) and (l), 10 a mortgage lender’s foreclosure
of an already-foreclosed condo is not complete until after the
confirmation judgment.
Next, AOAO expanded on its interpretation of HRS §
514B-146(n). It explained that in 2013 the legislature amended
HRS § 514B-146(n) to “specify how excess rental income received
9 With regard to AOAO’s argument that the circuit court should have ordered the Commissioner to pay the condo assessments accrued during the foreclosure to AOAO, the ICA held that the circuit court’s failure to award AOAO this relief was not an abuse of discretion.
10 As relevant here, HRS § 514B-146(i)(1) (Supp. 2018) defines the “completion” of the foreclosure as the recording of an affidavit in a non- judicial foreclosure pursuant to HRS chapter 667 or, in a judicial foreclosure, when the purchaser is deemed to acquire title under HRS § 514B- 146(b).
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by a condominium association after a foreclosure proceeding
shall be paid to existing lien holders.” (Quoting Conf. Comm.
Rep. No. 57, in 2013 House Journal, at 1539, 2013 Senate
Journal, at 799) (emphasis added).) The conference committee
report also indicated a desire to balance the interests of
condominium associations, mortgagors, and the lending industry. 11
AOAO further argued that the ICA’s interpretation of
HRS § 514B-146(n) rendered it superfluous. If an association’s
interest is foreclosed by summary judgment and a commissioner is
normally given possession and control in foreclosure, “then
there is no situation where the [a]ssociation will ever receive
rents following a mortgagee’s foreclosure and there will never
be a situation where excess rents are found to exist.” 12
In response, Nationstar argued that AOAO misinterpreted
HRS § 514B-146(n). Rather than entitling AOAO to possession,
“the statute mandates that Nationstar be paid any net rental
income received by AOAO after the Foreclosure Judgment.” It
11 AOAO further quoted language from the conference committee report that substantially tracked the language of subsection (n), namely by providing that “any excess rental income received by a condominium association after a foreclosure proceeding shall be applied to the benefit of the unit owner” and defining excess rental income as “net income received by the association after a court has issued a final judgment determining the priority of a senior mortgagee.” (Quoting Conf. Comm. Rep. No. 57, at 2013 House Journal, at 1539, 2013 Senate Journal, at 799-800 (emphasis added).)
12 Additionally, AOAO repeated its argument that for any months that Nationstar is awarded rent, it should be credited for common assessments.
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repeated that AOAO had already recouped its delinquencies and
that it incurred no upkeep costs after the foreclosure – as the
Commissioner was in possession – and therefore was not entitled
to any rents collected after the summary judgment.
Next, Nationstar quoted Bank of N.Y. Mellon v. Larrua,
150 Hawai‘i 429, 431, 504 P.3d 1017, 1019 (App. 2022), for the
proposition that a foreclosure decree is a “final determination
of a foreclosed party’s ownership interests in the subject
property.” In Larrua, as here, a lender foreclosed following an
association’s 13 previous foreclosure, and the circuit court
appointed a commissioner to collect rents, which it later
awarded to the lender. Id. at 431-33, 38, 504 P.3d 1019-21.
There, the ICA explained that the foreclosure decree
extinguished the association’s interests, and, even though legal
title did not immediately pass, the circuit court had the
equitable power to appoint a commissioner to take possession.
Id. at 440, 504 P.3d at 1028. So here, AOAO’s interest was
extinguished by summary judgment.
13 The defendant association in Larrua was the Association of Apartment Owners of Elima Lani Condominiums, the petitioner/defendant- appellant here. Id. at 431, 504 P.3d at 1019.
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III. STANDARDS OF REVIEW
A. Statutory Interpretation
“Questions of statutory interpretation are questions
of law to be reviewed de novo under the right/wrong standard.”
Guth v. Freeland, 96 Hawai‘i 147, 149–50, 28 P.3d 982, 984–85
(2001).
B. Foreclosure Actions Foreclosure is an equitable action. “Courts of equity have the power to mold their decrees to conserve the equities of the parties under the circumstances of the case.” A court sitting in equity in a foreclosure case has the plenary power to fashion a decree to conform to the equitable requirements of the situation. Whether and to what extent relief should be granted rests within the sound discretion of the court and will not be disturbed absent an abuse of such discretion.
Peak Cap. Grp., LLC v. Perez, 141 Hawai‘i 160, 172, 407 P.3d 116,
128 (2017) (citations omitted) (quoting Honolulu, Ltd. v.
Blackwell, 7 Haw. App. 210, 219, 750 P.2d 942, 948 (App. 1988)).
A circuit court sitting in foreclosure abuses its
equitable discretion “by issuing a decision that clearly exceeds
the bounds of reason or disregard[s] rules or principles of law
or practice to the substantial detriment of the appellant.”
Haw. Nat’l Bank v. Cook, 100 Hawai‘i 2, 7, 58 P.3d 60, 65 (2002)
(quoting Shanghai Inv. Co. v. Alteka Co., 92 Hawai‘i 482, 493,
993 P.2d 516, 526 (2000)).
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IV. DISCUSSION
This application requires us to answer two questions:
(1) whether, under our precedents, a foreclosed owner (in this
case, the association) is entitled to exclusive possession and
rents after the entry of summary judgment and an interlocutory
decree of foreclosure, but prior to the confirmation of sale;
and (2) if not, whether HRS § 514B-146(n) entitles the
association to rents accruing during this period, or some
portion of them, notwithstanding our precedents.
With respect to the first question, the ICA and
Nationstar are correct that AOAO’s right to possession was
terminated by the foreclosure judgment. 14 We have long
maintained that “[a] judgment of foreclosure of mortgage or
other lien and sale of foreclosed property is final . . . on the
ground that such judgment finally determines the merits of the
controversy . . . .” MDG Supply, Inc. v. Diversified Invs.,
Inc., 51 Haw. 375, 380, 463 P.2d 525, 528 (1969). Unless
provided otherwise by statute, AOAO was not entitled to rent or
possession after the circuit court entered summary judgment in
favor of Nationstar.
14 The court granted Nationstar’s motion for summary judgment, and issued a judgment of foreclosure against AOAO. The term “judgment of foreclosure” refers to the final determination in a judicial foreclosure proceeding, whether it is entered upon summary judgment or otherwise (for example, upon the defendant’s default, or after trial).
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As to HRS § 514B-146(n), the statute entitles
associations to continue receiving rent after a subsequent
mortgage foreclosure, even if a commissioner is appointed,
subject to paying any rent received in excess of the total
amount of the reimbursements enumerated in HRS § 514B-146(n)(1)-
(4) over to the lienholders in order of priority. Nationstar’s
argument that rents received by a commissioner are not “received
by the association” under the statute would result in the
statute having no practical effect. Therefore, further
proceedings are necessary to determine if AOAO was entitled to
all or some portion of the rent collected after a commissioner
was appointed.
A. A Foreclosure Judgment Extinguishes the Prior Owner’s Right to Possession, and a Commissioner May Take Possession Prior to a Foreclosure Sale
1. A foreclosure judgment is a final judgment extinguishing the prior owner’s right to possession
AOAO argues that because it owned the property, it
should have been allowed to continue to hold possession and
collect rent until a foreclosure sale was confirmed – that is,
after the foreclosure judgment. The ICA in this case relied on
Larrua. In Larrua, the ICA determined:
[U]nder Hawai‘i law, it is well-established that a judgment entered on a foreclosure decree is a final determination of the parties’ rights in the subject property – in other words, the property owners’ rights in the property are foreclosed, notwithstanding that further proceedings are necessary to enforce and otherwise
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effectuate the foreclosure decree and judgment.
150 Hawai‘i at 439, 504 P.3d at 1027.
The ICA is correct: the foreclosure judgment was a
final judgment that cut off AOAO’s right to possession. AOAO
was therefore not entitled to continue collecting rent.
We have held that “[a] judgment of foreclosure of
mortgage or other lien and sale of foreclosed property is final,
although it contains a direction to commissioners to make a
report of sale and to bring the proceeds into court for an order
regarding their disposition.” MDG Supply, 51 Haw. at 380, 463
P.2d at 528. This is because such a judgment “finally
determines the merits of the controversy, and subsequent
proceedings are simply incidents to its enforcement.” 15 Id.; see
also 55 Am. Jur. 2d Mortgages § 592 (2023) (“A mortgage-
foreclosure decree is a final judgment even though it creates a
right to redeem.”). Thus, we have analogized a confirmation-of-
sale proceeding to a “traditional ‘action upon a judgment’” in
that it merely “‘facilitate[s] the goal of securing satisfaction
of the original cause of action.’” Mortg. Elec. Registration
Sys., Inc. v. Wise, 130 Hawai‘i 11, 19, 304 P.3d 1192, 1200
(2013) (quoting Nat’l Union Fire Ins. Co. v. Owenby, 42 F. App’x
59, 63 (9th Cir. 2002) (mem. op.)). In other words, the
15 HRS § 607-102(b) is not to the contrary, as it does not address an association’s rights after a subsequent mortgage foreclosure.
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proceedings that follow the judgment “are treated as incidental
to enforcement of the foreclosure judgment.” Id.
Here, then, AOAO’s right to possession was terminated
when the court adjudged its interest foreclosed.
2. A mortgagee may seek the appointment of a commissioner to cut off the prior owner’s possession
AOAO further argues that the appointment of a
commissioner with authority to take possession and collect rent
was in error because AOAO is entitled to the “benefits of
ownership” until a foreclosure sale. (Emphasis omitted.) In
support, AOAO cited HRS § 514B-146(b), which provides that a
mortgagee does not acquire title in a judicial foreclosure until
after the confirmation of sale. However, Hawai‘i courts may
authorize a commissioner to take possession and collect rents
where the collateral is inadequate to satisfy a mortgagee.
HRS § 514B-146(b) establishes when a mortgagee or other
purchaser must begin paying common expenses and assessments; it
does not address the propriety of appointing a commissioner to
take possession of the property and facilitate the foreclosure
sale after the prior owner’s interest has been deemed
foreclosed. Larrua, 150 Hawai‘i at 441-42, 504 P.3d at 1029-30.
The appointment of a commissioner or a receiver is an
equitable remedy designed to preserve the status quo and protect
a lender’s collateral. “There is no doubt of the inherent power
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of a circuit court sitting in equity or in probate to call to
its aid special masters, auditors, examiners or even translators
for the purpose of assisting the court . . . .” 16 Haw. Ventures,
LLC v. Otaka Inc., 114 Hawai‘i 438, 485, 164 P.3d 696, 743 (2007)
(brackets omitted) (quoting In re the Estate of Lee Chuck, 33
Haw. 220, 223 (Haw. Terr. 1934)); see also U.S. Bank Tr., N.A.
v. Ass’n of Apartment Owners of Waikōloa Hills Condo. Phase I,
150 Hawai‘i 573, 582, 506 P.3d 869, 878 (App. 2022) (holding that
the appointment of a commissioner upon entry of foreclosure
judgment was “consistent with the Circuit Court’s equitable
powers and standard practices”). The appointment of a
commissioner is an appropriate remedy where the security for a
mortgage appears to be inadequate: “A court may exercise its
equity jurisdiction in appointing a receiver if there is danger
that the property will be insufficient security for the debt
. . . .” 4 Richard R. Powell, Powell on Real Property §
37.26[4][c], at 37-175 (2022) (emphasis added).
The United States Supreme Court has confirmed that the
foreclosed owner may continue in possession until its right of
occupancy is cut off by a court-appointed receiver: “[T]he
general rule is that the mortgagee is not entitled to the rents
16 Hawai‘i Rules of Civil Procedure (HRCP) Rule 66 (2018) preserves this authority: “The practice in the administration of estates by receivers or by other similar officers appointed by the court shall be in accordance with the practice heretofore followed.”
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and profits of the mortgaged premises until he takes actual
possession, or until possession is taken in his behalf by a
receiver, or until, in proper form, he demands, and is refused,
possession[.]” Freedman’s Saving & Tr. Co. v. Shepherd, 127
U.S. 494, 502–03 (1888) (emphasis added) (citations omitted).
This is because “[p]ossession draws after it the right to
receive and apply the income.” Gilman v. Ill. & Miss. Tel. Co.,
91 U.S. 603, 617 (1875).
Other jurisdictions have held that a prior owner or
other tenant is entitled to possession and rents until the court
appoints a commissioner. See, e.g., United States v. Am. Nat’l
Bank & Tr. Co., 573 F. Supp. 1319, 1321–22 (N.D. Ill. 1983)
(“Illinois law does hold that a mortgagor is entitled to rents
collected from the mortgaged property until the mortgagee or
receiver takes possession of the property . . . .”); Hoelting
Enters. v. Trailridge Invs., L.P., 844 P.2d 745, 749–50 (Kan.
Ct. App. 1993) (“[A] purely executory agreement alone is not
effective to vest in a mortgagee the right to rents and profits.
The right to rents and profits may vest in a mortgagee, however,
if . . . the mortgagor defaults and the court appoints a
receiver . . . .” (citation omitted)); cf. Schmalzl v. Peretta,
276 N.Y.S. 224, 225 (N.Y. App. Div. 1934) (per curiam) (holding
that a mortgagee was not owed rents collected during foreclosure
where they did not demand possession of the premises).
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In support, AOAO cited HRS § 514B-146(b), which
provides that a mortgagee does not acquire title in a judicial
foreclosure until after the confirmation of sale. However, the
ICA was correct to hold in Larrua that HRS § 514B-146(b) simply
establishes when a mortgagee or other purchaser must begin
paying common expenses and assessments. 150 Hawai‘i at 441-42,
504 P.3d at 1029-30. HRS § 514B-146(b) does not preclude
appointment of a commissioner to take possession of the property
and facilitate the foreclosure sale after the prior owner’s
interest has been deemed foreclosed. Id.
In sum, the appointment of a commissioner is an
equitable remedy that cuts off the prior owner’s possession and
right to collect rent. Although the circuit court stated that
the Commissioner would become the title owner of the unit, this
was incorrect; the Commissioner is a neutral arm of the court
holding the property on the court’s behalf. In any case,
however, AOAO’s arguments that it was entitled to continue to
possess the unit to the exclusion of the Commissioner are
mistaken.
B. HRS § 514B-146(n) Implicitly Abrogated the Common Law and Provided for Associations to Receive Post-Foreclosure Rent
AOAO claims it is entitled to rents by virtue of HRS §
514B-146(n), which “contemplates the [a]ssociation receiving
rental income from the [p]roperty following the issuance of a
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foreclosure decree.” Because HRS § 514B-146(n) twice mentions
“income received by the association,” AOAO argues it
affirmatively grants associations the right to receive rents
“after a court has issued a final judgment determining the
priority of a senior mortgagee.” Thus, AOAO should have
received all rents collected by the Commissioner except to the
extent they can be shown to be “excess rental income.”
The ICA rejected this view, relying on its decisions
in Larrua and Chinen. In Larrua, the ICA held that HRS § 514B-
146(n) “addresses only how an AOAO must utilize any rental
income it receives after its own foreclosure on the unit, when
its interest is subsequently foreclosed upon by a mortgagee.”
150 Hawai‘i at 444, 504 P.3d at 1032. The ICA concluded that
“while the statutory language [of HRS § 514B-146(n)] may
contemplate the AOAO receiving rental income from a unit after
the entry of a foreclosure decree and judgment, it does not go
so far as entitling the AOAO to such income.” 17 Id.
We disagree. The statute authorizes an AOAO’s receipt
of post-foreclosure rents and entitles the association to those
rents up to the sum of the amounts in subsections (1)-(4).
HRS § 514B-146(n) reads:
17 In Chinen, the ICA relied on Larrua to reject an association’s claim for rents based on HRS § 514B-146(n). 150 Hawai‘i at 584, 506 P.3d at 880.
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After any judicial or nonjudicial foreclosure proceeding in which the association acquires title to the unit, any excess rental income received by the association from the unit shall be paid to existing lien holders based on the priority of lien, and not on a pro rata basis, and shall be applied to the benefit of the unit owner. For purposes of this subsection, excess rental income shall be any net income received by the association after a court has issued a final judgment determining the priority of a senior mortgagee and after paying, crediting, or reimbursing the association or a third party for:
(1) The lien for delinquent assessments pursuant to subsections (a) and (b);
(2) Any maintenance fee delinquency against the unit;
(3) Attorney's fees and other collection costs related to the association’s foreclosure of the unit; or
(4) Any costs incurred by the association for the rental, repair, maintenance, or rehabilitation of the unit while the association is in possession of the unit including monthly association maintenance fees, management fees, real estate commissions, cleaning and repair expenses for the unit, and general excise taxes paid on rental income;
provided that the lien for delinquent assessments under paragraph (1) shall be paid, credited, or reimbursed first.
The first clause provides that the statute only
applies after an association has foreclosed. Id. The second
clause provides that “excess rental income” shall be paid to
senior lien holders by priority, to be applied for “the benefit
of the unit owner.” Id. In context, it is clear that “the unit
owner” refers to the owner prior to the association, on whom the
association foreclosed. See HRS § 514B-146(a) (Supp. 2015)
(allowing the association, during its foreclosure, to collect a
“reasonable rental” from “the unit owner”).
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In the second sentence of HRS § 514B-146(n), the words
“final judgment determining the priority of a senior mortgagee”
can only refer to a summary judgment and/or interlocutory decree
of foreclosure, which, as discussed, is a “final judgment” under
our precedent. See Peer News LLC v. City & Cnty. of Honolulu,
138 Hawai‘i 53, 69, 376 P.3d 1, 17 (2016) (“The legislature is
presumed to know the law when it enacts statutes, including this
court’s decisions . . . .”). Prior to such a judgment, the
association’s interest is unaffected. And the clause “after
paying, crediting, or reimbursing the association or a third
party” indicates that the AOAO or a third party — i.e., whomever
is owed the costs enumerated in subsections (1) through (4) —
will receive post-foreclosure rents up to the total amount of
those costs.
Read literally, HRS § 514B-146(n) only applies when
the rents are “received” by the association; arguably that would
not be the case if a commissioner is appointed and authorized to
collect rent. However, we interpret HRS § 514B-146(n) to apply
to rental income received by the association after a mortgagee’s
subsequent foreclosure, whether or not a commissioner is
appointed. The statute entitles the association to such income,
however collected, but only to the extent it does not exceed the
sum of the amounts listed in subsections (1) through (4). This
statutory scheme thus replaces the equitable distribution that
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our case law formerly required in cases where a commissioner was
appointed.
This result is necessary for HRS § 514B-146(n) to have
any logical effect. Appointment of a commissioner is common in
foreclosures where the security is inadequate to satisfy a
mortgage debt because it has substantial procedural advantages
for the mortgagor. 18 If the appointment of a commissioner
required that rent be awarded to the party that requested
appointment notwithstanding HRS § 514B-146(n), the statute would
only have practical effect in the very small number of cases
where the mortgagor failed to have a commissioner appointed by
the court. As argued by AOAO: “[u]nder the ICA’s
interpretation, HRS § [514B-146(n)] is superfluous. If at the
summary judgment stage, the Association’s interest is
‘foreclosed’ and a commissioner who is appointed is always given
possession and control of the Property—including the rents, then
there is no situation where the Association will ever receive
rents following a mortgagee’s foreclosure and there will never
be a situation where excess rents are found to exist.” We
18 “[T]he commissioner takes possession of the mortgaged property and preserves the property for the benefit of the person or entity subsequently entitled to it.” Larrua, 150 Hawaiʻi at 440, 504 P.3d at 1028; see also 1 Real Estate Finance Law § 4:33 (6th ed. 2016) (explaining that when foreclosing on properties, mortgagees generally prefer to seek appointment of a commissioner rather than obtaining possession themselves — even when the latter remedy is available — because it mitigates the need for an ejectment action, avoids accounting responsibilities, and insulates the mortgagor from tort liability).
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hesitate to read HRS § 514B-146(n) to apply only in this highly
unusual scenario.
The legislative history of HRS § 514B-146(n) supports
this reading. The bill that enacted subsection (n) was a
compromise between lenders and associations. The legislature
found that “the costs of default in a condominium are
substantially born by condominium associations and non-
defaulting unit owners” and that “the needs of the lending
industry and condominium associations and non-defaulting unit
owners must be appropriately balanced . . . .” Conf. Comm. Rep.
No. 57, in 2013 House Journal, at 1539, 2013 Senate Journal, at
799. “This measure achieves this balance by providing
condominium associations and non-defaulting unit owners with
relief while also addressing interests of the lending industry.”
Id. Indeed, an earlier version of the bill that enacted
subsection (n) also provided an unlimited super-priority lien to
associations for unpaid assessments, but the legislature
eventually settled on a six-month lien. Compare H.B. 21, H.D.
1, 27th Leg., Reg. Sess. (2013), with 2013 Haw. Sess. Laws Act
196, § 1 at 629.
Thus, in enacting HRS § 514B-146(n), the legislature
intended for a foreclosing association to be able to collect
what it was due and no more; hence, the association is to
receive all rents short of “excess rental income.” Accordingly,
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the statute calls for an accounting to take place upon
confirmation. The association must account for all rents from
the time it foreclosed on the property. If this amount exceeds
the sum of the assessment and maintenance delinquencies, the
costs of foreclosure, and the maintenance fees that accrued
while the association was in possession, the AOAO is not
entitled to retain rents accruing after the foreclosure.
However, if it still faces a shortfall even after the rent it
collected, it may continue to collect rent short of “excess
rental income.” HRS § 514B-146(n). When a commissioner is in
possession, the commissioner collects and holds the rent on
behalf of the court, which will ultimately be distributed upon
confirmation of the sale according to HRS § 514B-146(n).
This interpretation gives meaning to the common
understanding of the word “excess” as “the state of . . .
surpassing usual, proper, or specified limits.” Excess,
Merriam-Webster’s Collegiate Dictionary (11th ed. 2003).
“[E]xcess rental income” is income collected by an association
above and beyond what it was owed by the prior owners and the
costs it incurred. There is no reason for the association to
retain this amount while a mortgagee goes unpaid. Thus, it is
truly “excess” and must be paid to mortgagees to avoid creating
an improper windfall for associations at the lenders’ expense.
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One final interpretative problem arises. HRS § 514B-
146(a) provides that “[a]ll sums assessed by the association but
unpaid for the share of the common expenses chargeable to any
unit shall constitute a lien,” and HRS § 514B-146(n)(1) allows
the association to be paid, credited, or reimbursed for that
lien before turning over any excess rental income. But where an
association completes the HRS Chapter 667 power-of-sale
foreclosure process, HRS § 667-102(b)(3) provides that “[t]he
lien of the association . . . shall be automatically
extinguished from the unit.” Nationstar argues that because
AOAO’s lien was “automatically extinguished” under HRS §
667-102(b)(3) upon foreclosure, it could not have any
entitlement to post-foreclosure rents. Nationstar further
argues that under HRS §§ 667-3 and 667-10, proceeds from a
foreclosure sale must first be distributed to the unpaid loan
secured by the mortgage, with any remaining surplus distributed
next to junior lienholders in order of priority, then to the
owner, deducting any outstanding expenses owed.
However, HRS §§ 514B-146(n), 514B-146(a), and 667-
102(b) can be reconciled. “[W]here there is a ‘plainly
irreconcilable’ conflict between a general and a specific
statute concerning the same subject matter, the specific will be
favored. However, where the statutes simply overlap in their
application, effect will be given to both if possible, as repeal
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by implication is disfavored.” Richardson v. City & Cnty. of
Honolulu, 76 Hawai‘i 46, 55, 868 P.2d 1193, 1202 (1994) (quoting
Mahiai v. Suwa, 69 Haw. 349, 356–57, 742 P.2d 359, 366 (1987)).
HRS § 667-102(b) applies generally to association
foreclosures, whether or not a lender subsequently forecloses.
However, HRS § 514B-146(n) applies specifically to rent received
priority of a senior mortgagee.” Thus, while HRS § 667-
102(b)(3) generally extinguishes the association’s lien, this
lien continues to exist solely for the purposes of the
accounting in HRS § 514B-146(n), and the association may be
paid, credited, or reimbursed for it. 19
HRS §§ 667-3 and 667-10 generally govern how proceeds
should be distributed among lien holders following a foreclosure
sale. HRS § 514B-146(n) specifically governs rents collected by
an AOAO after a foreclosure sale and before confirmation.
Rather than a strict allocation according to the priority of the
lien under HRS §§ 667-3 and 667-10, these rents should be
allocated according to HRS § 514B-146(n)(1)-(4).
19 As for the provision that the lien for delinquent assessments “shall be paid, credited, or reimbursed first,” this provision merely directs that the association must first apply the rental income it receives to reduce the prior owner’s continuing liability to it. HRS § 514B-146(n).
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In sum, HRS § 514B-146(n) created a scheme to divide
post-foreclosure rents whether or not a commissioner is
appointed, with the association retaining everything up to
“excess rental income.” We remand to the circuit court to apply
this interpretation. 20
V. CONCLUSION
For the foregoing reasons, the circuit court’s May 16,
2018 confirmation judgment and the ICA’s May 2, 2022 Judgment on
Appeal are vacated with regard to the allocation of rents
collected by the Commissioner. This case is remanded to the
circuit court for further proceedings specifically to determine
what portion of the rents collected by the Commissioner after
the circuit court’s June 30, 2017 Findings of Fact, Conclusions
of Law and Order Granting Plaintiff’s Motion for Summary
Judgment Against AOAO constituted excess rental income pursuant
to HRS § 514B-146(n). Per that statute, AOAO is entitled to
receive any portion of those rents that do not constitute excess
rental income.
20 Because HRS § 514B-146(n) displaces the equitable principles that would normally govern allocation of rent in a proceeding where a commissioner is appointed, we do not reach AOAO’s argument that the circuit court should have considered its request to be awarded the association fees that accrued while the Commissioner was in possession. However, we note as a general principle that where HRS § 514B-146(n) does not apply, a circuit court should consider the equities and allocate rents accordingly. Although rents collected by a foreclosure commissioner will normally be awarded to the secured party for whose benefit the proceeding was instituted, in some cases equity may require a different result.
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R. Laree McGuire /s/ Mark E. Recktenwald for Petitioner/ Defendant-Appellant /s/ Paula A. Nakayama
Kalama M. Lui-Kwan /s/ Sabrina S. McKenna for Respondent/ Plaintiff-Appellee /s/ Michael D. Wilson
/s/ Todd W. Eddins